New Group Annuity on Regulators' Radar

Orlando
A new product that is described as looking like a typical group annuity but is actually a wrap product has recently surfaced in the market and regulators say that they need to watch it to make sure that there are no problems that may occur in the future.

During the fall meeting of the National Association of Insurance Commissioners, Kansas City, Mo., regulators of the Life & Health Actuarial Task Force were careful to say that the product needs to be discussed among regulators and might actually be useful to consumers.

However, they did discuss some of their potential concerns. The product issues was raised by Blaine Shepherd, a Minnesota regulator and actuary who said that the product is a form of wrap where certificate holders can exercise a form of living benefit if the assets in the product are depleted. The product, referred to as a contingent annuity, offers a living benefit guarantee to certificate holders if mutual funds which are part of the product lose their value. The insurer then steps in and pays benefits for the life of the contract holder. So, if there is no depletion of assets, then an insurer may never have to provide a benefit, according to the discussion.

Utah regulator Tomasz Serbinowski noted that the product seems to be marketed to pension plans. A number of pension plans are prohibited from investing in variable annuities and this product is pitched as an alternative, he explained. One interesting point about the product, he added, is that you don’t get a certificate when you start paying for the product, but only when the fund value goes to zero.

Larry Bruning, a Kansas regulator and LHATF chair, said that it sounds similar to a derivative product. Among the issues he said need to be examined is whether the product is properly reserved and risks are being properly managed. “I’m sure AIG [American International Group] thought it had gold in its hand when it wrote credit derivative swaps.”

Regulators plan to discuss the issue in a closed conference call.